Eurozone inflation falls despite buoyant economy

By PAN PYLAS -

1/31/18 6:06 AM

LONDON — The eurozone economy may be enjoying its best growth in a decade and seeing unemployment drop sharply, but there are few signs that is fueling the inflation that the European Central Bank is looking for.

In fact, figures Wednesday from the European Union’s statistics agency showed annual consumer price inflation across the 19-country bloc fell to 1.3 percent in January from the previous month’s 1.4 percent.

The January rate is the lowest since July and suggests the buoyant euro has weighed on prices by lowering import costs. For a variety of reasons, including the eurozone’s strong growth, the euro has been hugely in demand. On Wednesday, it was up 0.4 percent at $1.2448, just shy of the recently struck three-year high near $1.25.

Inflation has been below the European Central Bank’s target of just under 2 percent for most of the past few years. While low inflation is good for consumers as it allows their income to go further, it is a sign that workers have little power in getting the wage increases they are striving for from firms that are still operating on relatively tight margins.

That is evident in the fact that the core inflation rate, which strips out potentially volatile items like food and energy, remains stubbornly below the headline rate, though it did increase modestly in January to 1 percent from 0.9 percent.

The low inflation backdrop is the main reason why the ECB has yet to follow its peers such as the U.S. Federal Reserve or the Bank of England in reversing some of its crisis-era stimulus measures — the main interest rate remains at zero while the bank’s hefty bond-buying program continues to keep a lid on borrowing rates in the markets.

Last week, ECB President Mario Draghi gave few further hints about whether the bank will extend past September its current stimulus program, which involves the purchase of 30 billion euros ($36 billion) of bonds per month. The purpose of the purchases is to pump newly created money into the economy to raise inflation and growth in the wake of the debt crisis that has afflicted the eurozone for years.

With the crisis abating, the eurozone is growing strongly — figures Tuesday showed that the bloc expanded by 2.5 percent in 2017, its highest rate for a decade.

The hope, certainly among policymakers at the central bank, is that the growth will eventually boost inflation as consumers spend more and wage increases accelerate. Once inflation is back at target and growth remains firm, the ECB is expected to start to reverse course.

Draghi has said that the recent “remarkable” falls in unemployment will soon begin to see wages rise strongly and offset any legacy of the crisis, which has led many unions across the bloc to focus more on keeping jobs than on securing higher pay.

“Some recovery in wage growth seems imminent; German unions are pushing for higher wage increases in collective bargaining negotiations for example, but it will likely take at least until 2019 until wage growth is back at pre-crisis levels,” said Bert Colijn, senior eurozone economist at ING.

Separate figures released Wednesday from Eurostat showed the eurozone’s unemployment fell a further 134,000 in December but that the jobless rate held steady at a near nine-year low of 8.7 percent. Though unemployment has been falling consistently across the bloc for the past few years — evidence that the recovery is broad-based — it’s still double the rate in the U.S. and that’s acting as a break on wage rises.

The countries that were at the forefront of the debt crisis have seen some of the sharpest improvements. One standout has been Portugal. In December, its unemployment rate fell to 7.8 percent from the previous month’s 8.1 percent.

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